Business conditions in most sectors in the Third District softened from August to September. Manufacturers, on balance, reported a very slight increase in new orders but a steady rate of shipments. Retailers generally posted month-to-month and year-to-year declines in sales, as did motor vehicle dealers. Bank loan volume has been nearly flat in recent weeks. Residential real estate sales and construction activity continued to fall. Commercial real estate leasing and construction activity have slowed. Services sector firms generally indicated a slowing pace of business. Reports of increases in input costs and output prices were somewhat less widespread among business contacts in September than they were in August.

The outlook among Third District businesses is generally not positive. Although manufacturers surveyed in early September forecast increases in business activity during the next six months, contacts in other sectors do not expect improvement. Retailers expect a difficult holiday shopping period. Auto dealers see no signs that sales will pick up soon. Bankers anticipate slow loan growth and weakening credit quality into next year. Residential real estate agents and home builders expect sales to continue to remain slow until the latter half of 2009. Contacts in commercial real estate expect leasing and construction activity to decline during the next several quarters.

ManufacturingThird District manufacturers polled in early September reported a very slight increase in new orders and a near steady rate of shipments, on balance, compared with August. Around one-third of the manufacturers surveyed noted increases in those measures and just over one-fourth reported decreases. The slight positive balance of results among firms polled in September was a marked improvement over the negative balance in reports received from area manufacturers earlier this year. Firms with export business continued to see growth in demand for their products, and some firms noted that previously off-shored work "is returning from Europe and China." In contrast, firms producing building materials and construction equipment continued to see declining demand.

The outlook among Third District manufacturers surveyed for this report is positive, on balance. Nearly one-half of the manufacturers contacted in early September expect new orders and shipments to rise during the next six months, and about one-tenth expect declines--around the same ratio of positive to negative opinion as reported in August. Area manufacturers have boosted capital spending plans slightly since last month, on balance, although some respondents noted that "cash flow issues" and "restrictive bank lending practices" are limiting expansion in activity.

RetailMost of the retailers contacted for this report indicated the customer traffic and sales fell in September compared with the previous month and year. Some discount stores have experienced increased traffic and sales, although even in this category many stores have had declining sales. Retailers selling luxury items and higher-price merchandise have also posted recent sales declines, a change from the relatively stable or rising sales they had earlier this year. Other types of consumer spending have fallen in the District. Contacts in the lodging, travel, and restaurant industries generally reported significant declines in business since the last Beige Book. The outlook among Third District retailers is not positive. As one retailer phrased it, "The holidays are going to be ugly."

Auto dealers in the region reported a continuing downward sales trend in September. Sales fell compared with the previous month and year for dealers selling both domestic and foreign makes. Inventories were above desired levels but have not been growing, as dealers have been taking delivery of fewer vehicles.

Finance Total outstanding loan volume at Third District banks has been nearly flat in recent weeks, according to bankers contacted for this report. There has been a slight gain in real estate loans, but personal and business lending has been level to down for many banks. Most of the banks contacted for this report said that business loan demand was softening. Although most of the surveyed banks were "actively looking for credits" among potential business borrowers, recent consolidation affecting banks in the region has led to some interruption of loan marketing efforts at those institutions. Contacts in the region's financial services sector indicated that deposit growth has generally been holding up, although some banks noted a temporary increase in withdrawals by depositors following news reports of bank closings elsewhere in the country. Bankers indicated that nondeposit sources of funds have become more costly and less readily available. Contacts in residential real estate financing indicated they have had no difficulty funding residential mortgages with good credit quality and low leverage ratios, but contacts in commercial real estate financing said the availability of funds has declined sharply. Looking ahead, bankers expect loan growth to remain slow, and they expect some deterioration in credit quality in the current quarter that will continue into next year.

Real Estate and Construction Residential real estate activity in the Third District continued to weaken in September. Residential real estate agents reported that sales of existing homes continued on a downward trend compared with a year ago, and home builders continued to see falling sales of new homes. However, builders have been able to reduce inventories by cutting production and boosting incentives to promote sales of completed houses. One real estate agent said that most recent sales have been "nonelective," necessitated by changes in sellers' or buyers' personal circumstances. Contacts in residential real estate expect the decline in sales and construction to level off sometime during the winter, but they do not expect activity to pick up until late next year, and they expect the recovery to be modest.

Commercial real estate firms indicated that construction, leasing, and purchase activity have been trending down since the summer. Rents have been nearly steady, although concessions have increased somewhat. Commercial real estate contacts reported that the number of firms putting off plans to increase space has risen, although they noted that in most markets in the region "the supply-demand balance is intact" and is expected to remain so unless firms in the region make large cuts in employment. However, many contacts expect commercial construction activity to decline significantly during the next several quarters.

Services Service-sector firms generally reported easing in growth or declining levels of activity in September. Some business services firms indicated that their client firms were stepping up efforts to reduce costs by cutting back on their uses of outsourced services. Firms providing personnel services noted that their business has weakened as employment in the region has begun to decline. The outlook among area service firms has weakened since the last Beige Book. Some consulting and technology firms said they expected more demand for their services from companies looking for ways to streamline operations and reduce costs, but most business services firms expect that maintaining current rates of activity or expanding their business during the next several quarters will be "much tougher than normal," as one contact said.

PricesReports of increases in input costs and output prices have declined somewhat since the previous Beige Book. Firms in the region continued to note pressure on their profit margins from high energy and raw material costs. They also reported rising prices for petroleum-based products and metals. Retailers have stepped up discounting, and many are planning to promote low-cost items for gift-giving in the upcoming holiday season.